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In Depth Information
Depreciating the Finer Things in Life
depreciation can be applied evenly over all the periods. In this case, each
period of the asset’s life has an equal amount of depreciation to apply. The
different depreciation methods are summarized in Table 6-1.
The depreciable cost is the original cost minus the salvage value.
That Uses the
Evenly applies the depreciable cost (Cost –
Salvage) among the periods. Uses the formula
(Cost – Salvage) ÷ Number of Periods.
First sums up the periods, literally. For
example, if there are five periods, then the method
first calculates the sum of the years’ digits as
1 + 2 + 3 + 4 + 5 = 15. Creates an accelerated
depreciation schedule. See Excel Help for
Creates an accelerated depreciation
schedule by doubling the Straight Line depreciation
rate but then applies it to the running
declining balance of the asset cost, instead of to the
fixed depreciable cost.
Figure 6-2 shows a worksheet with a few different depreciation methods. The
methods use the example of a delivery truck that costs $35,000, is used for
12 years, and has an ending value of $8,000. An important calculation in all
these methods is the depreciable cost, which is the original cost minus the
salvage value. In this example, the depreciable cost is $27,000, calculated as
$35,000 – $8,000.
In the three depreciation methods shown in Figure 6-2 — straight line, sum of
the years’ digits, and double declining balance — all end having the
accumulated depreciation at the end of life equal to the depreciable cost, or the cost
minus the salvage.
However, each method arrives at the total in a different way. The Straight
Line method simply applies an even amount among the periods. The Sum of
Years’ Digits and Double Declining Balance methods accelerate the
depreciation. In fact the Double Declining Balance method does it to such a degree
that all the depreciation is accounted for before the asset’s life is over.